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Price elasticity of demand for potatoes.

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Introduction

Potato exam question (a) (i) The price elasticity of demand is a measure of how responsive demand for a product is to the changes in its price. From the passage it is suggested that the PED for potatoes is inelastic, meaning that consumers are not very responsive to price change in potatoes. "The price to us this year is 2p a pound but the housewife is still paying 10, 12 or even 15p a pound." This means that if the PED value was calculated the figure would be less than 1, as the percentage change in price would be greater than percentage change in demand, which means that consumers are insensitive to price change in necessity goods. If a PED curve were to be drawn it would be steep. (ii) The price elasticity of supply is a measure of how responsive supply for a product is to the changes in its price. From the passage it is suggested that the PES for potatoes is inelastic, meaning that suppliers are not very responsive to price change in potatoes. ...read more.

Middle

However the reason to why this doesn't occur ie - the price does not fall to P1 at the point X is because to prevent this price fall, the Board has "artificially" bought up this extra supply of wheat. This artificially shifts the demand curve form D to D2 for the potatoes outwards, maintaining the price at a new equilibrium point of E2, at a chosen interventionist level of P2. (c) Two problems that might arise in making surplus UK potatoes available for consumption in Eastern Europe is as follows. Due to technological advances, this means that the probability of a bad harvest is minimal. Therefore the likelihood of a good harvest each year is relatively high, which means that the Board are always buying up excess supply of agricultural produce such as potatoes, but never supplying it back onto the market. Hence there is an unnecessary build up of food. This means that Eastern Europe have a surplus of potatoes and so third world countries who are suffering and require food have to starve, whilst booming Eastern European countries have an abundance of food and do not require it, and so there are no benefits to either country. ...read more.

Conclusion

This is beneficial to the consumers as the price will fall to try and encourage demand to increase. However because consumers are price inelastic to commodities such as potatoes, meaning that they are not really responsive to a price change in potatoes, the price fall will only increase the quantity of potatoes demanded by a very insignificant amount. This means that farmers lose more revenue than they gain, which can result in bankruptcy for the farmers, whilst the consumers benefit by the fall in price. To prevent this from happening a buffer stock scheme needs to be installed to benefit both consumers and producers. In the unlikely event of a bad harvest the following would occur. If there happened to be a bad harvest, supply would decrease from SS to S2S2. This is beneficial to the producers (farmers) as the price will increase to try and encourage demand to decrease. This means that farmers gain more revenue than they lose which can result in benefits for the farmers and detriment for the consumers, as they have to pay a high price. To prevent this from happening a buffer stock scheme needs to be installed to benefit both consumers and producers. ...read more.

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